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Optimal Sovereign Default

Klaus Adam () and Michael Grill

American Economic Journal: Macroeconomics, 2017, vol. 9, issue 1, 128-64

Abstract: When is it optimal for a fully committed government to default on its legal repayment obligations? Considering a small open economy with domestic production risk and noncontingent government debt, we show that it is ex ante optimal to occasionally deviate from the legal repayment obligation and to repay debt only partially. This holds true even if default generates significant deadweight costs ex post. A quantitative analysis reveals that default is optimal only in response to persistent disaster-like shocks to domestic output. Applying the framework to the situation in Greece, we find that optimal default policies suggest a considerably larger and more timely default than the one actually implemented in the year 2012.

JEL-codes: E23 E62 F41 H63 (search for similar items in EconPapers)
Date: 2017
Note: DOI: 10.1257/mac.20140093
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Working Paper: Optimal sovereign default (2013) Downloads
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Working Paper: Optimal sovereign default (2012) Downloads
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Handle: RePEc:aea:aejmac:v:9:y:2017:i:1:p:128-64